2016 (9) TMI 347 - AAR - Income Tax

Chargeability to capital gains tax in India - Applicant, a tax resident of Mauritius - DTAA between India and Mauritius - transfer of 9,870,912 shares of an Indian Company - Held that - We perused the minutes of proceedings of the Board meetings held in Mauritius relating to buyback of shares, final closing for sale of shares held in TML, appointment of KPMG India Private Limited as tax advisor, approval of financial statements, dividend declaration and distribution etc. We also noted that the Board of Directors included representatives of BT Holdings Limited, a UK company, holdings 43% of shares. These Board meetings and the nature of decisions taken in such meetings clearly indicate that control and management of affairs of the company, particularly all financial affairs were situated only in Mauritius. Hon ble Supreme Court held in the case of CIT V. Nandlal Gandalal (1960 (4) TMI 3 - SUPREME Court ) that the expression control and management means de facto control and management and not merely the right or power to control and manage. The word affairs means the affairs of a HUF which are capable of being controlled and managed by the family as such. In the case of VVRNM Subbayya Chethiyar also the apex court held that the word affairs must mean affairs which are relevant for the purpose of the Income-tax Act and which have some relation to income. On the basis of facts mentioned above, it cannot be said that the control and management of the affairs of the applicant company were wholly situated in India. The Department of Revenue has not given any substantial evidence to show that any important affairs of the company relevant for the purpose of the Income-tax Act were being controlled from India. The only argument of the Department seems to be that the real transaction was between TML and AT&T and, therefore, the control and management of the applicant should be treated as in India. There is no force in this argument as there is nothing wrong in the applicant holding the shares and transferring the same at a later stage as per the options agreement and on fulfillment of conditions by AT & T as per the agreement. Therefore, we are unable to agree with the objections raised by the Department of Revenue and hold that the applicant is not chargeable to tax in India under Article 13(4) of India-Mauritius Treaty.

Summary

Issues Involved:
1. Taxability of capital gains in India under Article 13(4) of the DTAA between India and Mauritius.
2. Applicability of the 10% tax rate on long-term capital gains under Section 112(1) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Taxability of Capital Gains in India under Article 13(4) of the DTAA between India and Mauritius:

The applicant, a tax resident of Mauritius, acquired shares in Tech Mahindra Limited (TML), India. The shares were later transferred to AT&T International, Inc., resulting in significant capital gains. The primary question was whether these gains were taxable in India under Article 13(4) of the DTAA between India and Mauritius.

The applicant argued that as a tax resident of Mauritius, it should benefit from the DTAA, which exempts capital gains realized by Mauritius residents in India. The applicant supported this with a tax residency certificate from Mauritius and referenced Circular No. 682 and Circular No. 789, which clarified that a TRC from Mauritius suffices to apply the DTAA benefits. The Supreme Court's ruling in UOI v. Azadi Bachao Andolan upheld the validity of Circular No. 789.

The Department of Revenue contended that the applicant was a nominee of the founder companies (M&M and BT) and was incorporated solely to facilitate a tax-neutral transfer of shares to AT&T. They argued that the real transaction was between TML and AT&T, and the applicant's incorporation lacked economic substance. They further claimed that the control and management of the applicant were situated in India, invoking Article 4(3) of the DTAA and Section 6(3)(c) of the Income-tax Act.

The applicant refuted these objections, asserting that it was set up for a legitimate commercial purpose and continued to hold shares in TML. It demonstrated that its Board of Directors, primarily based in Mauritius, managed its affairs independently. Key decisions, such as financial matters, dividend declarations, and share buybacks, were made in Mauritius. The applicant cited several legal precedents to support its claim that control and management were exercised from Mauritius.

The ruling concluded that the applicant successfully established that its control and management were situated in Mauritius. The Board meetings and decisions taken in Mauritius indicated that the company's affairs were managed from there. The Department of Revenue failed to provide substantial evidence to prove otherwise. Consequently, the applicant was not chargeable to tax in India under Article 13(4) of the India-Mauritius Treaty.

2. Applicability of the 10% Tax Rate on Long-Term Capital Gains under Section 112(1) of the Income Tax Act, 1961:

Given the ruling on the first issue, the second question regarding the applicability of the 10% tax rate on long-term capital gains under Section 112(1) did not arise. Since the applicant was not chargeable to tax in India under the DTAA, this issue became moot.

Conclusion:

The ruling pronounced on 8th August 2016 concluded that the applicant, a tax resident of Mauritius, was not chargeable to capital gains tax in India under Article 13(4) of the India-Mauritius Treaty. Consequently, the question of the 10% tax rate under Section 112(1) of the Income Tax Act did not arise.